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Survival Guide for Traders

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Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offi ces in North America, Europe, Aus-tralia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.

The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.

For a list of available titles, please visit our Web site at www.WileyFinance.com.

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Survival Guide for Traders

How to Set Up and Organize Your Trading Business

BENNETT A. MCDOWELL

John Wiley & Sons, Inc.

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Copyright © 2012 by Bennett A. McDowell. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:McDowell, Bennett, 1957- Survival guide for traders : how to set up and organize your trading business / Bennett A. McDowell. — 1st ed. p. cm. — (Wiley trading) Includes index. ISBN 978-0-470-43642-4 (hardback); ISBN 978-1-118-15941-5 (ebk); ISBN 978-1-118-15940-8 (ebk); ISBN 978-1-118-15939-2 (ebk) 1. Electronic trading of securities. 2. Online stockbrokers. 3. Investments. 4. Finance, Personal. 5. Small business—Management. 6. Home-based businesses— Management. I. Title. HG4515.95.M395 2011 332.640285'4678—dc23 2011025466

Printed in the United States of America10 9 8 7 6 5 4 3 2 1

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http://www.copyright.comhttp://www.wiley.com/go/permissionshttp://www.wiley.com

To each and every trader who has the perseverance and courage to live their dreams

and turn those dreams into reality.Godspeed to you all on this

miraculous and rewarding journey.

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vii

Contents

Foreword xiii

by Toni Turner

Preface xvii

Acknowledgments xix

Disclaimer xxi

Introduction: Survival of the Fittest xxiii

PART I Survival Basics 1

CHAPTER 1 It’s a Jungle Out There! 3

Brawn, Brains, and Technology 4

Technological and Innovation Time Line 5

Don’t Bring a Knife to a Gunfight 7

Right in My Own Backyard 7

CHAPTER 2 Managing Your Money Is Serious Business 9

Trust and Financial Advisers 10

Tips on Selecting a Qualified Financial Adviser 11

So, Who Are You Going to Trust? 12

Creating Your Own Business Plan Will Strengthen

Your Ability to Prosper 13

Trade, Invest, and Live within Your Means 14

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viii CONTENTS

CHAPTER 3 Accountability, Setting Stops, and the Rogue Factor 15

Traders Are the Ultimate Entrepreneurs and

Must Be Held Accountable 16

Setting Stop-Loss Exits Is Essential 17

The Infamous Rogue Trader Named Nick Leeson 17

Watch the Rogue Trader Movie 18

Insurmountable, Large Losses Usually Start

As Small Losses 19

CHAPTER 4 What’s Your Net Worth? 21

Net Worth Statement 21

Creating Your Financial Profile 22

Are You Moving Forward, Falling Backward,

or Standing in Place? 28

CHAPTER 5 The Life of an Entrepreneur 31

New Start-Up Businesses Have High Failure Rates 31

What Does It Take for a New Business to Succeed? 32

Small Businesses Are the Backbone of the Economy 34

Reduce Your Expenses and Increase Your Revenue 35

How to Reduce Expenses 36

A Penny Saved Is Really One and a Half Pennies Earned 38

It’s All About the Revenue 39

CHAPTER 6 Understanding Financial Markets 41

Buyer and Seller Agree on Price, but They Disagree

on Value 42

Buyers and Sellers and the Financial Order Flow Process 42

Types of Orders 49

Using Margin and Leverage 52

The Importance of Liquidity and Volume 53

Zero Liquidity 56

Volatility and Market Gaps 58

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Contents ix

How Can the Bid and Ask, Spreads, Fills, and

Slippage Affect Your Profits? 61

You Can Parallel Test Your Broker and Data Feeds 62

“I Feel the Need for Speed” 63

So Many Markets to Choose From 64

Ticker Symbols at a Glance 65

How to Choose the Best Data Feed for Your Needs 66

How to Choose the Best Broker for Your Needs 70

How to Choose the Best Front-End Platform for Your Needs 72

Manias, Panics, and Crashes 73

CHAPTER 7 Adapting to Changing Market Cycles 75

Four Major Market Cycles 75

It’s All in a Name 78

Using Trend Lines to Identify Market Cycles 79

Using Elliott Wave Analysis to Identify Market Cycles 80

Pitfalls of Not Identifying Market Cycles Correctly 81

CHAPTER 8 Education and Support 83

A Few Classic Trading Books 83

Learning Styles 84

Repetition, Repetition, Repetition 85

Paper Trading Is an Essential Learning Tool 85

Do it Your Way 86

You Can Learn from Your Mistakes and Failures 87

Life Mentors, Professional Mentors, and Trading Coaches 88

CHAPTER 9 Writing a Business Plan 91

Business Plan: Blank Template 91

Front Matter: Title Page, Table of Contents, and

Mission Statement 93

1. Summary 94

2. Strategy 108

3. Operations 118

4. Financials 124

Business Plan Tips 128

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x CONTENTS

Part II The Financial Pie 129

CHAPTER 10 The First Slice: Trading and Investing Rules 131

Develop and Test Your System 132

Perseverance Is the Holy Grail 132

Failure Is Not an Option 133

Creating Your Trading Rules Profile 134

A Note about Day Trading versus Position Trading 138

Holding Trades Overnight and Assuming Overnight Risk 140

My Definition of Scalping 141

Sample Trading Rules to Start With 141

Combining Fundamental and Technical Signals in

Your Trading Rules 142

Technical Analysis Signals 143

Fundamental Analysis Signals 146

Value Investing in a Bear Market 148

The Importance of Paper Trading 148

Set Up Multiple Brokerage Accounts to Monitor

Your Trading Results 152

CHAPTER 11 The Second Slice: Scanning for Opportunities 155

Technical Scanning Techniques 156

Fundamental Scanning Techniques 157

Opportunity Is Always Abundant in the Markets 165

Stocks 165

Options 169

Futures 170

Forex 174

Exchange-Traded Funds 177

CHAPTER 12 The Third Slice: Money Management 179

What Can Money Management Do for You? 179

Three Ways to Control Risk 180

Risk Factors to Develop Your Plan Around 180

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Contents xi

Stop-Loss Exits Can Save the Day 182

Your Survival Depends on Having a Healthy Respect

for the Risk of Ruin 184

Optimal f Formula: Information Similar to the Risk

of Ruin Tables 186

Comparing Optimal ƒ Equation Results to the Risk of

Ruin Tables 187

The 2 Percent Risk Amount Formula 188

Using the Trade Size Formula 188

Trade Size Formula Using Leverage 189

Using the Trade Size Calculator 190

Good Record Keeping and Performance Analysis

Are Essential 191

Without Risk, There Is No Opportunity . . . 192

CHAPTER 13 The Fourth Slice: Financial Psychology 193

The Trader’s Mind-Set 194

Even Good Change Can Be Stressful and Emotionally

Challenging 195

Looking at 15 Destructive Psychological Trading

Issues and Their Causes 196

Optical Illusions Show How Our Minds Can Mislead Us 198

EPILOGUE 201

APPENDIX A Online Bonus—Survival Guide Central 203

APPENDIX B ART Basics 209

APPENDIX C Resources: Front-End Platforms, Brokers, Data Providers, and More 243

APPENDIX D Suggested Reading and Education 255

APPENDIX E Market Exchanges 273

Glossary 283

About the Author 307

Index 309

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xiii

Foreword

Butter!” we’d yell, our eyes glued to fl ashing level II screens on our monitors. “Bu-utter!”It was the mid-1990s. About two dozen of us jeans-clad trad-ers sat at long tables littered with keyboards and banks of monitors. We pounded out trades as we yelled. “Butter” was our code word for a rapidly melting level of ask prices on our level II screens. It meant gluttonous bulls were slicing through—buying—each price level of stock offered for sale—and fast. Our stocks’ prices were soaring. Life was good!

Outside the squat stone offi ce building that housed our trading room, the cold, concrete city spread below. Smokestacks, streets, parking ga-rages, and skyscrapers all refl ected the steel-colored New York skies.

In our neon-lit room, however, shades of gray dissolved. Black or white ruled. Why? Because the stock market took no prisoners. Each day, we won . . . or we lost. Our hearts, minds, and trading accounts fl ew high on the white wings of each victorious trade. Or they descended into black holes of despair on the agony of trades gone sour.

What did we trade? “Any four-letter stock that moves,” we declared staunchly. Of course, we were referring to the four-letter symbols of the high-fl ying stocks listed on the NASDAQ exchange. Most were Internet bubble stocks—but we didn’t know about bubbles back then.

We did know that they exploded 20, 30, or more points a day (higher or lower), fueled by the high-octane energy twins, volume and volatility.

Ask any of us if we knew to which sector or industry group our stocks belonged, and you’d usually get a shrug. Who cares? If it moved, we traded it.

Miraculously, my trading account and I survived those go-go days. Of course, I learned a lot of lessons, some more enjoyable than others. I do know that had I and my trading buddies been given access to the com-monsense content now put forth in Survival Guide for Traders, our losses would have been leaner and our wallets fatter.

In Survival Guide for Traders, author and trading expert Bennett McDow-ell offers you the framework of decision-making tools you need to establish and execute a successful trading business. And make no mistake. Trading is a business.

“

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xiv FOREWORD

After all, who would we nominate for “Most Likely to Succeed”? The trader who has set up and organized his or her trading business with the kind of well-thought-out planning Bennett details in this book? Or would we nominate the “I’m-gonna-get-rich-by-Friday” trader, who jumps into trades without forethought of account size, share size, protective stops, and other risk management tactics that Bennett reveals in these pages?

Survival Guide for Traders tells you how to set up and organize your trading business in the best possible way. In each chapter, you will fi nd a virtual cornucopia of helpful graphs, tables, and information you can per-sonalize and apply to your trading business.

Survival Guide for Traders is divided into two parts: (1) Survival Ba-sics and (2) The Financial Pie. Five appendixes at the book’s conclusion provide the reader with additional resources, from online brokers to books and movies that feature trading and Wall Street themes to discussions of Bennett’s ART trading platform.

In Chapters 1 and 2, Bennett warns traders that “It’s a Jungle Out There,” and advises readers of the importance of formulating a business plan.

Too many times, novice traders jump into the market with a fi stful of cash and a burning desire to “beat the Street.” Either they aren’t aware that successful trading demands a business plan or they don’t think that kind of planning is necessary. The mind-set that accompanies that approach lacks discipline. Result? The stock market drools, smacks her lips, and eats those unlucky traders before the closing bell chimes.

Chapters 3 and 4 help you create your net worth statement. Such a statement is a vital action for all of us to complete. For traders, knowledge of your exact net worth is essential for creating your fi nancial profi le. More-over, Bennett kindly provides several Sample Financial Profi le templates for you to choose from. You can also study the Sample Net Worth Curve table; it can assist you in anticipating and guiding the direction of your discretionary capital.

In Chapter 5, the discussion centers on the entrepreneurial lifestyle. Six points detail actions you can take to ensure that your trading business moves forward in the best way.

Bennett also talks about simple, yet often ignored concepts that are so important to success. For example, “reduce expenses and increase rev-enue” is a given for any business owner. Yet as traders, it’s easy for us to get so immersed in market action that we forget to keep an eye on everyday business expenses that drain our funds. Confession: I am guilty of subscrib-ing to too many expensive fi nancial newspapers, some of which I haven’t time to read each morning. I just canceled those extra subscriptions. Thank you, Bennett, for the valuable reminder to use money management in every area of our trading business.

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Foreword xv

In Chapters 6, 7, and 8, Bennett spotlights the order fl ow process, types of orders, margin and leverage, the bid-ask spread, data feeds, and more—essential information traders need to begin executing trades. He goes on to talk about the four types of market cycles and shows readers how to rec-ognize them. Again, here is more vital information that will help you excel.

The content in Chapter 9 provides readers with a comprehensive busi-ness plan. Bennett also includes a Vision Statement form, and ones for Money Management Strategy, Order Execution, and Profi t and Loss History, among others. This is another chapter in Survival Guide for Traders that I wish I’d had access to a dozen years ago. Taking the time to fi ll out these planning tools embeds the seriousness of our trading business into our psyches.

Chapter 10 delves into trading and investing rules. If you apply these to your trading plan and use them with discipline and forethought, your trad-ing results can improve nicely.

In Chapters 11 and 12, Bennett discusses scanning tools for both tech-nical and fundamental analysis. While many traders do not incorporate fun-damental analysis into their daily trades, I’m delighted to see that Bennett’s view aligns with mine—that applying at least the most basic fundamental knowledge to trades can give you an edge. Bennett also moves into one of the most neglected—but most important—aspects of trading, risk manage-ment. He offers a comprehensive list of all types of protective stops, which every trader should have at his or her elbow. As Bennett says, using risk management in the form of planning and placing stops “allows you to be wrong and not go bust.” Well said and so true!

Chapter 13 is devoted to the trader’s mind-set. Bennett furnishes readers with several checklists to consider, and they all pertain to establishing the proper mind-set with which to approach the markets. To me, this chapter alone is worth the price of the book. We’ve all seen traders who have rows of monitors and the best trading platforms money can buy. Know that all the equipment—and even gobs of fi nancial knowledge—works only when those traders approach the markets with an appropriate frame of mind.

Survival Guide for Traders shows traders effi cient and effective ways to build a strong and lasting foundation for their trading careers. Read it, then reread it and take full advantage of the fountain of information in these pages. This book belongs in every trader’s library as a timely and compelling guide to success.

Toni TurnerAuthor, A Beginner’s Guide to Day Trading Online,

A Beginner’s Guide to Short-Term Trading,Short-Term Trading in the New Stock Market;

President, TrendStar Trading Group, Inc.www.ToniTurner.com

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xvii

Preface

Survival is at the heart of this book, more than getting rich quick or making a fast killing. Maybe on the surface that idea appears to lack ambition, but many of you who have been caught off guard even once by the power and speed of the fi nancial markets know and understand the need for caution when entering even a routine investment or trade. Surgeons will say that there is no such thing as “routine” surgery. The same applies in the fi nancial markets—there is no such thing as a routine trans-action. Even deceptively safe vehicles can surprise the individual who is not alert and respectful of the markets’ overall supremacy.

What this means is that you cannot control the markets; instead you have to learn to listen to the markets and follow their lead, whether they be in a bullish cycle or a bearish one. The markets have the ultimate power to do as they desire despite any of us who may hope and wish for them to behave as we want them to. Much like Mother Nature, the markets can wield their strength swiftly and unexpectedly. For this reason it is best to study the markets, to be educated and prepared, and to never let your guard down.

Having outlined the goal—to survive (and as a result prosper)—the next step is to look at managing your hard-earned money as a business. It is not a hobby or an afterthought—or a nonexistent thought; your money is most absolutely serious business, and this book, Survival Guide for Trad-ers, is going to teach you how to survive and prosper by treating it that way.

You’ll learn how to run a profi table trading business by keeping your eye on the ball and keeping expenses down and revenue up. Most impor-tant, we’ll show you why the old fashioned buy and hold strategies are not as effective as they used to be and why we all need to take more control over our fi nances—and even if we have qualifi ed advisers, why we need to be in the driver’s seat. With the ammunition in these pages, you’ll have tools

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xviii PREFACE

that can guide you through any market moving up, down, or sideways, and safeguard your trading and investment portfolio against unnecessary risks.

Ultimately, this book is intended to teach you how to personally build a profi table business using all your assets—fi nancial, physical, and intel-lectual—that will succeed and last a lifetime.

Bennett A. McDowellSan Diego, California

September 2011

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xix

Acknowledgments

The very fi rst edition of the Survival Guide for Traders was self- published back in the year 2000. The goal of the fi rst survival guide was to outline the formula for success in the business of trading, and that fi rst paperback edition covered the basics in less than 100 pages.

Fast-forward to the year 2011, as we’re just sending off the manuscript to the publisher for this new John Wiley & Sons edition of the Survival Guide for Traders, and my editor tells me this edition will be more than 300 pages. The growth of this book is symbolic of the fact that we’ve come a long way in the past decade. And that is in no small part thanks to the many fantastic clients, business partners, and family members who have been supportive all along the way. You have all helped shape the content of this book, and I thank you.

The journey started in 1998 when I fi rst obtained the domain name for my website at www.TradersCoach.com back when the Internet was just tak-ing off. At the time my brokerage business kept me busy with clients who liked active trading, and my methodology, now known as the ART® soft-ware, was what I used to trade their accounts for them. If you can believe it, back then I drew all my charts by hand to determine entries and exits.

We later transformed my manual approach into the ART software so that my clients could follow along at home, and that was released in 2003. Since then we have seen the popularity of the ART software grow to where it is today used by clients in over 50 countries around the world. The jour-ney continues to 2008, when my fi rst two John Wiley & Sons books were released. Their titles are The ART of Trading and A Trader’s Money Man-agement System.

This brings us to 2011 and the release of this new book. My thanks go out to the entire staff at John Wiley & Sons, the greatest publisher on the planet. Laura Walsh, my editor, thank you for being so nice, patient, and professional—you are a gem! Judy Howarth, you are terrifi c at keeping everything right on track and Claire Wesley you are my production super hero! And of course thank you to David Pugh for your cherished friendship and for discovering us in New York City back in 2007.

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xx ACKNOWLEDGMENTS

Thanks also go out to a number of industry partners who were generous with their time in giving me input on a number of the chapters in the book, especially Chapter 6. John Gromala and Ryan Sindelar at NinjaTrader, Julie Craig at eSignal, Mark Grieco and Michelle Moore at Trade Station, Glen Larson and Pete Kilman at Trade Navigator, and Matt Verdouw at Market Analyst, thank you all for your generous feedback—it is greatly appreciated.

Then of course there are a number of wonderful educators in this in-dustry that I am fortunate to have worked with over the years and to whom I am sincerely grateful. These exceptional people include Larry McMillan, Steve Nison, Stan Dash, Larry Pesavento, Bill Williams, and Leslie Joufl as, to name a few. Thank you all.

Thank you also to Ed Schramm and Jayanthi Gopalakrishnan from Technical Analysis of Stocks & Commodities magazine and Larry Jacobs from Traders World magazine. You are my favorite media moguls.

And of course, thank you so much to Toni Turner. It is an honor for her to write the Foreword to this book—in this business of trading geeks, she is one of the few traders who is a fabulous writer as well. (And I love having her as a neighbor here in southern California!)

Last but not least, thanks to my terrifi c partner and wife, Jeannie. Many of you have met her at the trade shows or talked to her on the phone. I will let you know that without her this book might not have been fi nished, since she did all the tables and organizing of the manuscript. Thank you, sweet-heart; you are the best!

Just as with running a successful trading business, writing a book takes more than just one player to pull it off. Teamwork from my wife, industry partners, and my fantastic clients has all contributed immensely to this work. Thank you all for making the Survival Guide for Traders a reality!

Bennett A. McDowellSan Diego, California

September 2011

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xxi

Disclaimer

The information in this book, Survival Guide for Traders, is intended for educational purposes only. Traders and investors are strongly advised to do their own research and testing to determine the validity of any trading idea or system.

Trading in the fi nancial markets involves substantial risk, and TradersCoach.com, Bennett A. McDowell, or affi liates assume no responsibility for your success or failure in trading or investing in the markets. For this reason you should use only money you can afford to risk. Furthermore, past performance does not guarantee future results. Thus, even if you were successful with your trading and investing in the past, you may not be suc-cessful in the future. TradersCoach.com and Bennett A. McDowell make no performance representation or guarantee of any kind or nature. TradersCoach.com encourages you to conduct your own research and engage in numerous practice trades prior to risking any actual money.

Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since trades have not actually been ex-ecuted, results may have undercompensated or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs and ideas in general are also subject to the fact that they are designed with the benefi t of hindsight. No representation is being made that any account will or is likely to achieve profi ts or losses similar to those discussed.

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INTRODUCTION

Survival of the Fittest

By striving to be the fi ttest, you may not be the biggest, but you can develop your unique strengths to outperform the average fi nancial market participant. Sometimes the smaller fi sh is more nimble and can adapt to changing environments more effi ciently. The smaller trader or investor may realize he or she has a smaller margin for error and may in turn be smarter than the larger fi sh that may carelessly lose money in the markets, simply because they can afford to.

Regardless of your portfolio size, be smart. Work smarter, not harder. Your survival and prosperity depend on it. This will be your edge in the market.

YOUR FINANCIAL PIE

Many of my students have heard me talk over the years about the “fi nancial pie” concept when it comes to successful trading and investing. The illu-sion that so many novices in the market believe is that all they need is one magic system, or adviser, or software package, or market tip. The reality is that it takes a lot more than that to be consistently successful in the markets.

Take a look at Figure I.1, and you’ll see the four essential slices of the “fi nancial pie” you will need to master in order to be successful in the markets. They are your: (1) trading and investing rules, (2) scanning for opportunities, (3) money management, and (4) fi nancial psychology. We cover all of these four important slices of the pie in detail in the coming chapters, but let me plant the seed of an idea in your mind: that you must approach the market with a broad view and an open mind.

xxiii

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xxiv SURVIVAL OF THE FITTEST

You will see how to improve your portfolio’s performance by acquaint-ing yourself with a variety of techniques and tools, all of which are impor-tant to the process. It is the weakest link that will hinder your development, so try to identify where you need the most improvement and dive into that area until all the links have uniform strength.

LAYOUT OF THIS BOOK

This book is laid out into two parts plus fi ve Appendix sections in a way that takes you step-by-step through the most important aspects of pre-serving your capital and growing your capital. The format is meant to help you get at the survival basics quickly before you have a chance to get into trouble.

For that reason, the book is written in simple, clear language and does not go into enormous depth on any one topic. There are other books that

FIGURE I.1 Financial PieYou will need to master all four pieces of the “fi nancial pie” to become consistently successful in the markets.

1. Trading andInvesting Rules

2. Scanning for Market

Opportunities

4. FinancialPsychology

3. MoneyManagement

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Survival of the Fittest xxv

you can turn to once you have fully absorbed the topics covered here. The main focus is to highlight the most essential areas for study so that you develop a vocabulary that you can expand on at your own pace.

In addition to the hard copy of this book, you will have access to a web-site link that will be constantly updated with the latest and most current information. This link will provide you with free videos, printable PDF fi les, and other related survival guide information. You will also have access to free trials to a number of TradersCoach.com software products. You can access all of this current Survival Guide Central information and free soft-ware trials by going to the following link:

www.traderscoach.com/survivalguide.php

Part I: Survival Basics

This part introduces you to the most important aspects of survival in the markets. Here you will learn how important it is to treat your trading as a serious business and you will determine how to implement a process to monitor and evaluate your progress. This includes setting up accountabil-ity procedures, determining what your net worth is, and learning how to best utilize all of your natural resources.

You’ll learn the importance of always keeping an eye on revenue and expenses, the core of any business. These two line items can sneak up on you if you’re not paying attention, and it is crucial to keep costs down and revenue up at all times.

Then we help you understand fi nancial markets from order fl ow to data feeds to getting the most value from your broker. You will fi nd out about the nature of a variety of market cycles and how they can dramatically affect your profi tability. And last, you will see how to design an effective business plan that will get results.

Part II: The Financial Pie

Successful trading or investing is not dependent on just one single skill, approach, or idea. Instead, it is achieved by mastering a number of areas that are all equally important. My way of explaining this concept is to break it down into four equal parts of a pie, which is what I call the “fi nancial pie.” (See Figure I.1.) Part II of this book covers all four of these important “fi nancial pie” areas and shows you how to master them.

1. The fi rst slice of the pie is designing a set of trading and invest-ing rules that are consistently profi table. Designing your trading and investing rules requires that you match your own unique person-ality and experience level with an appropriate approach that you can

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xxvi SURVIVAL OF THE FITTEST

effectively implement. This means you have to know yourself, and identify your strengths and risk tolerance, to fi nd the right combina-tion of tools and strategies in order to become consistently profi table. In Chapter 10 you will learn about a variety of approaches to use to achieve this goal.

2. The second slice of the pie is scanning for market opportunities. The key to any successful fi nancial approach is fi nding high-probability opportunities in the market. Traders must learn that the markets offer us infi nite opportunity—it is just a matter of developing the skills to uncover the highest-probability trades at any given moment. Chapter 11 shows you fundamental and technical ways to fi nd opportunities. You will learn about ways to use technology to do the heavy lifting of scanning for the best trades every day.

3. The third slice of the pie is money management. This area of the markets is so often ignored and yet is one of the areas where you will gen-erally see the quickest progress when properly implemented. In Chapter 12 we talk about all areas of money management from record keeping to managing risk. You will learn to use some simple formulas that will help keep you out of harm’s way and maximize your profi t potential.

4. The fourth slice of the pie is fi nancial psychology. Psychology is by far the most diffi cult and abstract piece of the fi nancial pie to master and in Chapter 13 we address this very important topic. Very often we can be our own worst enemy in fi nancial endeavors, and understanding this will enable us to secure our own survival. What is it that motivates us to succeed? How do fear and greed factor into our decision mak-ing? How dedicated and persistent are we at attaining our goals? These questions are the tip of the iceberg, and opening up the discussion will surely start you on the road to a better understanding of yourself.

All four of these pieces of the pie are important to master. The trading success chain is only as strong as its weakest link, so you need to self-evaluate to determine which of these four areas needs the most attention. You will fi nd information in Part II that can assist you in fi ne-tuning all four of these areas.

WWW.TRADERSCOACH.COM/SURVIVALGUIDE.PHP

This website, www.traderscoach.com/survivalguide.php, combined with your purchase of this book is your free access ticket to Survival Guide Central, SGC. This feature will enable you to keep your copy of the

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Survival of the Fittest xxvii

Survival Guide for Traders current for years to come. Plus, you will have access to a printable version of the business plan found in Chapter 9. Just visit this website and you will fi nd these features, along with access to the free software trials that the purchase of this book entitles you to. Be sure to have a copy of your Survival Guide handy when visiting this link, as you will be asked a security question to ensure that you are a current owner of this book before gaining free access to Survival Guide Central. If you have any questions or need assistance in registering for this special online feature, you can call us at 858-695-0592 or e-mail us via Info@TradersCoach.com.

YOU CAN SURVIVE AND PROSPER IN TODAY’S FINANCIAL MARKETS

It is all up to you, and there is no doubt in my mind that if you apply your-self and are persistent you will be able to use these ideas and will look at your trading and investing in a new way. This will open up infi nite possibil-ities for your fi nancial future. You can reach me at any time with questions and comments by sending an e-mail to Team@TradersCoach.com.

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